Treasuries Gain Most in Six Weeks as Economic Growth Falters

New York (June 29) Treasuries gained the most in six weeks, sending yields on 10-year notes to a more than three-week low, as reports showed the U.S. economy contracted more than forecast in the first quarter and inflation remains subdued.

The gains put U.S. government debt on pace for a second consecutive quarterly advance even after economists forecast higher yields in the first half of the year. A report next week is projected to show the U.S. added more than 200,000 jobs for a fifth straight month in June for the first time in 14 years. The gap between yields on two-year notes and 30-year bonds, known as the yield curve, narrowed to the least in more than a year as investors bet slower growth will keep the Federal Reserve from accelerating interest-rate increases forecast for next year.

“Things seemed to have stalled,” said William Larkin, a money manager who oversees $520 million in assets at Cabot Money Management in Salem, Massachusetts. “It’s going to be about jobs. Globally yields are falling. That’s putting pressure on U.S. interest rates.”

The yield on the benchmark 10-year note fell seven basis points, or 0.07 percentage point, to 2.53 percent this week, according to Bloomberg Bond Trader data. The 2.5 percent note due May 2024 gained 20/32, or $6.25 per $1,000 face amount, to 99 22/32. The yield touched 2.51 percent yesterday, the lowest level since June 2.

The drop was the most since the week ending May 16. The yield has dropped 50 basis points over the past two quarters, the most since the six months ending September 2012.

Bond Returns

Treasuries returned 3.2 percent this year through June 26, according to Bloomberg World Bond Indexes. German securities gained 4.8 percent, while Japan’s earned 1.5 percent.

The extra yield that benchmark U.S. 10-year notes offer over their Group of Seven counterparts was at 66 basis points yesterday. It touched 71 basis points on June 17, the most since April 2010.

Citing slow growth, Citigroup Inc., one of the 22 primary dealers that trade with the central bank, yesterday cut its year-end forecast for the 10-year note yield by 40 basis points, to 2.95 percent, from 3.35 percent.

“The data have been very disappointing -- 2014 should have been a breakout year for growth with consensus estimates close to 3 percent for the year,” strategists Amitabh Arora and Kevin Shapiro wrote in a report.

The firm also cut year-end estimates for the 30-year bond yield to 3.45 percent, from 3.85 percent, and the yield on the five year note to 2.25 percent from 2.45 percent.

Yield Curve

The difference between yields on two-year notes and 30-year bonds narrowed to 2.86 percentage points on June 26, the least since May 2013 as investors bet slower growth will limit the rise in long-term borrowing rates.

Labor Department data July 3 will show payrolls increased by 215,000 in June, down from 217,000 last month.

U.S. gross domestic product shrank at a 2.9 percent annualized rate in the first quarter, the worst reading since the same three months in 2009, the Commerce Department said June 25. A report June 26 showed consumer spending rose less in May than economists predicted. A separate report showed the personal consumption expenditures price index rose to 1.8 percent from a year ago, below the Fed’s 2 percent annual inflation goal, which is based on the gauge.

“The economic news doesn’t generate that high water mark that everyone was expecting that would bring the Fed tightening story back into play,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp.

Auction Demand

Traders have cut to 54 percent the chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, down from 66 percent odds at the end of March, fed funds futures showed.

The rally in Treasuries reduced demand at auctions of $94 billion of fixed-rate notes this week to the lowest level in a year. Investors bid 2.8 times the amount of two-, five- and seven-year securities sold this week, the least for the series of offerings since June 2013.

The Treasury sold $30 billion in two-year debt on June 24, $35 billion in five-year securities and $13 billion of two-year floating-rate notes on June 25. It auctioned $29 billion in seven-year notes June 26.

Fed Chair Janet Yellen last week affirmed policy makers’ plan to hold the benchmark rate in the range of zero to 0.25 percent, for a “considerable time.”

Fed officials at a June 17-18 meeting cut their long-run estimate for the target interest rate to 3.75 percent from 4 percent and lowered their prediction for long-term economic growth to a range of 2.1 percent to 2.3 percent, versus 2.2 percent to 2.3 percent forecast in March.